95% and 100% mortgages

What is a 100% mortgage?

A 100% mortgage is when you borrow the full price of the property and there’s no deposit to put down. This can be useful if you’re struggling to save for a down payment. No deposit mortgages were common before the 2008 global financial crisis, but tighter control of mortgage lending regulations put an end to that. Nowadays, options for 100% mortgages are limited, as there is a higher level of risk involved for lenders, and they are likely to have higher interest rates than products with lower loan to value ratios.

Remember, you may lose your home if you can’t keep up with the mortgage repayments. You may need a guarantor, such as a parent or relative, to reassure lenders that monthly payments will be covered even if you can’t make them, before you get accepted for a 100% mortgage.

What is a 5% mortgage?

Also known as a 95% mortgage, this means that buyers need to provide a deposit of 5% of the value of the property they want to buy. For example, with a 5% mortgage on a £200,000 home, you would need to come up with £10,000 in savings. 95% mortgage deals usually come with higher interest rates than with a lower loan-to-value ratio – in other words, you’ll probably pay less interest if you borrow a smaller proportion of the property’s purchase price.

Lenders will decide how much to lend you, and at what rates, based on their policy criteria and affordability checks, as they have to work out if you can afford the repayments.

How much deposit do you need for a mortgage?

You will usually need to have a deposit of at least 5% of the cost of your home to get a mortgage. A larger deposit will make you less risky for mortgage lenders, and may help you get more competitive mortgage deals with lower interest rates.

Mortgage affordability rules take into account not only how much you are earning, but how much you are spending, to see if you can cope with your planned mortgage repayments. And not just now, but also in the future if interest rates go up, or if your own financial or lifestyle situation changes.

How do you save for a house deposit?

Budgeting – To save money, and to show lenders you can afford your repayments, you may need to cut down on some costs. One idea is to look at regular outgoings that you could live without - gym membership, magazine subscriptions, multiple satellite channels or even just daily branded café lattes on the way into work. It can all add up - so a budget calculator or spreadsheet could help you keep an eye on your savings. Some renters even decide to go home to their parents for a few months to help save some more for a deposit.

Help to Buy ISA – If you can save up to £200 a month, the government boosts your savings by 25%, up to a maximum of £3,000. The Help to Buy ISA needs as little as a 5% deposit, with an equity loan or mortgage guarantee.

Lifetime ISA – This has a higher annual maximum contribution (£4,000) and gives interest from day one, with a bonus of 25% at the end of the tax year.

5 risks of getting a 100% mortgage

As with all mortgages, you may lose your home if you can’t keep up with the monthly payments.

No deposit usually means higher interest rates.

Falling house prices could lead to negative equity, when you owe more than the actual value of your home.

If you have a guarantor, their own home may be used as security, meaning they could lose it if they can’t help you keep up with the repayments.

You may have to pay a Mortgage Indemnity guarantee (MIG) premium, an insurance to protect the lender against loss if you default.

How your credit score could help you find a mortgage deal

The kind of mortgage you can get depends on how lenders see you. Their criteria can vary, but checking your Experian Credit Score – which is based on the information in your Experian Credit Report – can give you an idea of how the lender may see you.

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